segunda-feira, 2 de março de 2009

Dependency Theory: the MERCOSUR case study

1. Introduction
The aim of this paper is to analyze how the formulations of the Dependency Theory help to explain the process of formation of the MERCOSUR trading bloc. Its main purpose is to show that the Dependency Theory, along with the return to democratic rule in the Southern Cone, played a pivotal role in shaping the integration process in South America. It will be argued that theoretical influences of the Dependency Theory (along with the concrete social transformations that took place in the region such as the return to democratic rule) were the two pillars of which the foundation of MERCOSUR rests upon.

The Dependency Theory evolved from the workings of ECLAC - the Economic Commission for Latin America and the Caribbean, whose Director was Raúl Prebisch, a leading Argentine economist. The main objective of ECLAC, founded in 1948 with a view to encourage economic cooperation among its member states, was to promote development in Latin America. Hence, ECLAC’s main purpose was to discuss viable ways to attain development for the region. Spero & Hart note that “by the end of the 1950s, many Southern states came to believe that export growth combined with protection of domestic markets could maximize efficiency of production and increase earnings and foreign exchange available for development, much as the liberals had always argued” (Spero & Hart: 2003). They note furthermore, “according to a number of influential spokespersons for the developing countries, most notably Raúl Prebisch, such benefits could not occur without a restructure of the international trading system, because the existing system was biased against Southern exports” (ibid.). The reason for this was the declining terms of trade assumption, according to which the prices of commodities exported by South America were declining in relation to the prices of manufactured products imported from the developed countries. This was due to the fact that demand in the Northern Hemisphere for primary products from the Southern Hemisphere was believed to be inelastic with respect to income. As a consequence, increases in the production of such products meant a decline in prices, rather than an increase in consumption (ibid.).

Two perceptions could be rightly said to form the core belief of the Dependency Theory analysis: the importance of domestic markets, and the role that should be played on the path to development by import substitution strategies. Both core ideas (importance of domestic markets and import substitution) are also at the heart of the foundation of MERCOSUR, which was essentially created as a way of promoting economies of scale (enlarging domestic markets) in order to compete autonomously (thus completing the import substitution cycle that had begun in the 1950s) in a globalized world.

By the time the bloc emerged, the perception of the diplomacies of Brazil and Argentina, the two leading nations of MERCOSUR, was that only an enlarged bloc could provide the countries in the region with a platform for a so-called sovereign insertion in a globalized world economy. Such perception, present at the time when the foundation of MERCOSUR was being discussed by the region’s foreign ministries and their respective governments, was deeply embedded in the Dependency Theory’s assumptions about core states and peripheries. As a matter of fact, avoiding insertion as a peripheral region has been the main obsession of the diplomacies of the main countries in the region, particularly Brazil and Argentina, which rightfully aspire to a central role in the international scene due to the size of their populations, the size of their territory and the weight of their resources.

Having overcome old rivalries for hegemony over the region, Brazil and Argentina began discussing, at the end of the 1980s, viable ways to join the globalized economy, once events in the world stage (the end of the Cold War, the emergence of the European Union, the fall of the communist regimes in Eastern Europe, the gathering pace of globalization, etc.) made clear that the autarchic insertion these two countries had sought until then was no longer viable. Hartz Oliveira affirms that “[...]policymakers in Argentina and Brazil perceived that major economic integration between states would provide a unique way to strengthen regional positions in future dealing with the world’s largest trading blocs” (Oliveira: 2003).

In this context, formulations of the Dependency Theory reemerged as a powerful motivator. It could not have been different, in fact, for no other theory has influenced so deeply the academic perception of the region as much as the Dependency Theory did. Once Brazilians and Argentines started looking for ways forward, the formulations of the Dependency Theory constituted the main source upon which scholars would look for inspiration. It is no coincidence, in this regard, that the Brazilian president who most advanced regional integration during his two terms in office, Mr. Fernando Henrique Cardoso, had been a leading author of the Dependency Theory, alongside Theotonio Dos Santos. It is no coincidence, either, that Mr. Henrique Cardoso’s background was that of ECLAC, were he had worked in the 1950s before becoming a Professor at the University of Sao Paulo and later on President of Brazil. For scholars acquainted with the recent history of the region, therefore, the connections between Dependency Theory and the formation of MERCOSUR are all too clear. The objective of this paper is to expose such intrinsic links.

2. Formulations of Dependency Theory
First of all, it is important to note that the Dependency Theory, like most other bodies of theory in international political economy, is not a unified theory. There are several different approaches to the theory, some more radical, others of a more liberal nature. Ferraro notes that “there are still points of disagreement among the various strains of Dependency theorists and it is a mistake to think that there is only one unified theory of Dependency” (Ferraro: 1976). Due to the scope of this paper, it is not our intention to exploit all the conceptual differences of the individual strains of Dependency Theory. It is important to notice, however, that from a Brazilian perspective the formulations of Theotonio dos Santos and Fernando Henrique Cardoso gave the most robust contributions to the establishment of the core values in foreign policy that later led to the foundation of MERCOSUR. In order to corroborate our arguments regarding the influences of Dependency Theory on the foundation of MERCOSUR, this mainstream approach to Dependency will be privileged. It should be noted that both Dos Santos and Henrique Cardoso represent traditional ECLAC values and their theories share, in general lines, all main core assumptions. Identifying such core assumptions will suffice, therefore, for the sake of illustrating how these ideas played a pivotal role in shaping the diplomatic and political mentality that ultimately led to the creation of MERCOSUR.

As mentioned above, a set of core assumptions could be regarded as integral parts of the Dependency Theory, despite the unequivocal existence of different strains. The main assumption is deeply rooted in historical materialism: the idea that historical developments shape the possibilities of action for present actors. Ferraro argues that “the Dependency Theory attempts to explain the present underdeveloped state of many nations in the world by examining patterns of interactions among nations and by arguing that inequality among nations is an intrinsic part of those interactions” (Ferraro: 1976). He refers back to Theotonio dos Santos belief that “[Dependency is]... a historical condition which shapes a certain structure of the world economy such that it favors some countries to the detriment of others and limits the development possibilities of the subordinate economics [...] a situation in which the economy of a certain group of countries is conditioned by the development and expansion of another economy, to which their own is subjected” (Dos Santos: 1971). It is clear that proponents of Dependency Theory view it as profoundly anchored in history. As a matter of fact, historical materialism is one of the main pillars upon which the Dependency Theory rests.

That historical materialism is one of the main pillars upon which the Dependency Theory rests should be no surprise to scholars acquainted with South America, the region where the Dependency Theory was bred. The history of the continent during the time the theory appeared was deeply marked by two interconnected phenomena: underdevelopment and Marxism, following the establishment of a Communist regime in Cuba. The Cuban revolution left profound marks on the region’s recent history and is rightly viewed as a turning point. During the 1960s, and as a consequence of the Cuban revolution, Marxist ideals penetrated deeply into the social and intellectual tissues of Latin America. Perhaps as a consequence of the region’s disappointment with the alliance with the United States, forged after the end of World War II, countries in the region started losing faith in the possibility that a profound and visceral association with capitalist interests in the US could lead the region to develop. Burning with jealousy over the amount of money invested by the USA in the reconstruction of post-war Europe, countries such as Brazil and Argentina started considering developing alternatives to what they perceived as a failure of the developed brother to the north (the USA) to assist efficiently with the development of the region.

The failure of the Alliance for the Progress, proposed by President Kennedy to promote development in Latin America, added to the dissatisfaction. Due to this climate of dissatisfaction and to the repercussions incurred by the success of the guerilla movement in Cuba, Marxist ideas were hugely popular in Brazilian and Argentine universities in the 1950s and 1960s. For a South American intellectual, applying historical materialism’s conceptual tools to the region’s economic problems was an all too natural way of capturing the “Zeitgeist” of the region. Exactly in this context, the Dependency Theory evolved.

As discussed earlier, two core beliefs of the Dependency Theory are the importance attributed to domestic markets, and import substitution strategies. These two core beliefs were particularly important in shaping the diplomatic paradigms that ultimately led to the formation of MERCOSUR. Regarding domestic markets, globalization and the severe economic crisis of the 1980s made it clear for leaders and policymakers in the region that although both Brazil and Argentina enjoyed considerable domestic markets, they would have to enlarge the scale of their domestic markets in order to compete successfully under these new conditions. Of particular importance was a strategy to obtain foreign direct investment, viewed as the only plausible alternative to the shortage of domestic savings and the indebtedness of the countries of the region, which resulted from the severe economic crisis of the 1980s; the so-called “lost decade”.

Since the region was competing head on head with Asia and newly independent Eastern Europe for scarce foreign direct investment, it had to boost its credentials by enlarging already sizeable domestic markets. The prospect of the MERCOSUR creation became, in this regard, very attractive. With a combined population of some 250 million people, and the possibility of enlarging even further to encompass all of South America, the proposal of the formation of MERCOSUR was welcomed with enthusiasm by industry in Brazil. Creating a larger common market meant, in this context, enlarging domestic markets and therefore augmenting the potential to attract foreign direct investment. It must be added that the strategy has worked remarkably well, with the region being consistently listed at the top of foreign direct investments listings worldwide.

Regarding the positive effects of the creation of MERCOSUR on trade, Spero & Hart note that “[t]he formation of MERCOSUR resulted in a rapid increase in intraregional trade. From 1984-1986, only 6.7 percent of regional trade was accounted for by intraregional trade. By 1994 this figure had risen to around 20 percent” (Spero & Hart: 2003). Furthermore, they note that “trade among the MERCOSUR countries rose from $2 billion in 1991 to around $30 billion in 2000” (ibid.).

Creating a common market also meant increasing economies of scale, a crucial undertaking in a time when the economies of the region had to face competition from abroad. This came after a period of prolonged autarky, during the 1960s and 1970s, which was used, as seen earlier, to promote import substitution. Spero & Hart affirm that “until the 1990s, regional integration in the South had not, for the most part, resulted in much growth in intraregional trade, largely because of import substitution policies” (Spero & Hart: 2003).

It was during this autarkic period, however, that both Brazil and Argentina experienced sustained growth in industrial production. In Brazil, import substitution strategies were implemented in a remarkably consistent manner, becoming a kind of credo of virtually all administrations since the 1950s. Once it became evident that the import substitution-autarky model had run its course, economies of the region became scared of international competition. In this regard, many viewed MERCOSUR as a testing ground for the economies of the region to succeed in a highly competitive world market. Spero & Hart note correctly that “in the 1990s, Southern governments began to experiment with new forms of regional integration as a way to promote exports and increase the international competitiveness of regionally based multinational corporations” (Spero & Hart: 2003).

The rationale behind this move was: let us first learn to compete, in a healthy manner, with our neighbors so that later on we can compete globally. In this quest for efficiency, creating economies of scale became paramount. Spero & Hart assert that “in the 1990s regional strategies became more promising as developing countries began to reduce tariffs, sometimes unilaterally, in an effort to expand exports” (Spero & Hart: 2003). If the autarkic model was essential to the implementation of import substitution strategy, following Dependency’s advice, integration was essential to making local industries competitive in order to face competition in a rapidly globalizing world market, a reality that had become unavoidable in the 1990s.

3. The formation of the MERCOSUR
The MERCOSUR bloc, a customs union formed by Argentina, Brazil, Paraguay and Uruguay (with Venezuela currently in the process of becoming full member) represents, along with the European Union, one of the best models of regional integration in recent times. As such, it represents a major change in international politics in today’s world, for it implies a significant transfer of prerogatives from state level to regional transnational level.

With the establishment of civilian rule in Argentina (1984) and Brazil (1985), prospects for cooperation between both countries began to increase. In November of 1985, during the civilian presidencies of José Sarney (Brazil) and Raúl Alfonsín (Argentina), the Declaration of Iguazú was signed, and a program of enhanced cooperation in political and economic terms agreed upon (Argentine Brazilian Economic Integration Program - ABEIP). According to Cason, “The ABEIP marked a break with previous integration efforts. Whereas Argentina and Brazil had traditionally been economic and military rivals in South America, the ABEIP agreements signaled a new push toward cooperation and an attempt to downplay past differences” (Cason: 2000). Moreover, Cason notes that “(t)he ABEIP also evolved as both countries were emerging from periods of military rule, and both saw the agreements as a way to strengthen their fledgling democracies” (ibid.). This view is corroborated by Hartz Oliveira. Oliveira notes that “The final steps toward the creation of Mercosur took place in July 1986 with talks between Brazil and Argentina, which led to the 1988 Argentine and Brazil Economic Integration Program (ABEIP)”. Janina Onuki rightly asserts that the new external policy implemented in Argentina during the first democratically elected presidency of Raúl Alfonsin had very positive repercussions for cooperation with Brazil (Onuki: 2006).

This pattern of renewed strategic cooperation led to the signing of the Brazil-Argentina Cooperation and Integration Treaty in 1989. This treaty would subsequently represent the basis for the MERCOSUR constitutive treaty, the Asuncion Treaty of 1991, which created the Mercado Comum Do Sul or Southern Common Market - MERCOSUR, strategically linking together Brazil, Argentina, Paraguay and Uruguay.

According to Pion-Berlin, “(t)he treaty, along with a subsequent series of protocols, committed the members to pursue a steady path of economic openness and coordination, moving from simple trade liberalization via tariff reduction to the creation of a common external tariff and, eventually, to the easing of restrictions on service, capital and labor flows” (Pion-Berlin : 2000). Hartz Oliveira asserts that “the treaty of Asuncion, signed during the boom of the 1990s, defined the objectives of the integration process and the mechanisms required to achieve them” (Oliveira: 2003). He notes, furthermore, that “The treaty equally recorded the decision of the four countries to extend the bounds of their own national markets, as a way of achieving better penetration within the international economic order, increasingly colored by globalization” (ibid.). This view is also shared by Onuki, who stresses that the treaty derived basically from the growth in commercial exchanges and the convergence of interests in the implementation of liberalizing economic policies. (Onuki: 2006).

In 1995, after several years of negotiation and the signing of the Ouro Preto protocol, the customs union was finally established between Argentina, Brazil, Paraguay and Uruguay. An external tariff on goods was created for all signatory members and the free movement of factors of production agreed upon. A major strategic alliance between Brazil and Argentina was forged with a view of establishing, first, a common market, and second, a full-blown union, that would substitute for the old rivalry that had endured since the very onset of the two nations. Hartz Oliveira is right in affirming that the signing of the Ouro Preto protocol marks the end of the transition period and the beginning of the maturity phase of the bloc’s constitution (Oliveira: 2003). Onuki also asserts that the signing of the Ouro Preto protocol marks the beginning of the second phase of the integration process, which stretches all the way to 1999, the year in which the Brazilian currency, the Real, suffered its worst devaluation crisis in recent times (Onuki: 2006). For Onuki, this phase could be characterized by the increased interdependence among member states and also by the increased credibility of the group, probably as a consequence of the fact that henceforth the bloc would have an internationally recognized legal status as a subject of international law.

It is important to note, furthermore, that the dramatic increase in commercial exchanges between member countries during the first half of the decade gave an extra impetus to the integration process (Onuki: 2006). To illustrate the impact of this increase in commercial flows, the Brazilian Ministry of Commerce estimated that in 1997 commercial flows between member-countries had increased by 300 percent since the signing of the Asuncion Treaty (ibid.).
An important step in the process of linking economic integration and democratic forms of government took place in 1998 when the Ushuaia protocol was signed. According to its directives, observing democratic rule became an integral part of the unions’ structure, and signatory countries agreed to abide by this rule or face expulsion from the group. The core meaning of the Ushuaia protocol for democracy in the region would later be tested in a serious governance crisis in Paraguay. After a series of events that endangered the country’s political stability, the other members of the MERCOSUR union decided to put diplomatic pressure on Paraguay by threatening to implement sanctions as indicated in the Ushuaia protocol, including expulsion from the trade bloc, if necessary. Eventually, democracy was restored in Paraguay. Moreover, it is worth noting that since the establishment of MERCOSUR the southern cone has experienced one of its longest periods of democratic stability, with no single member-country returning to military rule.

Onuki is straightforward in stressing that the integration model adopted by MERCOSUR was of a liberal nature, being often termed “open regionalism”. For her, the main significance of the regional agreement is that it opened up for the countries involved, the possibility of enlarging their competitive edge in the global market (Onuki: 2006). The idea was to coordinate the most dynamic sectors of production with a view to obtaining greater economies of scale, and therefore becoming more competitive in the inevitable process of globalization. The rationale behind this idea was simple: if the world economy is becoming increasingly more globalized in nature, and if the development of the region is dependent upon external and historical factors (Dependency’s core assumption about historical materialism), then it follows that countries in the region ought to integrate in order to compete, or face becoming obsolete loci of production. Or, to put it another way, circumstances shape the habits. New circumstances meant that new habits were required, the most striking one being a cooperative stance between Brazil and Argentina.

To be sure, there have always been sporadic attempts at cooperation in the Southern Cone. From the time the nations of the region became independent from colonial rule, proposals for greater regional integration emerged. These proposals ranged from a full blown union of South American republics to diverse kinds of common markets. The importance of the Latin America Free Trade Area - LAFTA, established in the 1960s, and its successor, the Latin America Integration Area – LAIA, established in the 1980s is well known (Tussie: 1982). Both were particularly inspired by ECLAC’s views and therefore also deeply influenced by the Dependency Theory. None of them, however, matches MERCOSUR in scope, ambition and success. The reason for this probably lies in the role played by historical conditions. Although integration was a desire for many a nation in the region ever since independence, it was only after it had become evident that globalization was an unstoppable process that the imperative of linking domestic markets at a regional level in order to gain efficiency and economy of scale became paramount.

4. Formulations of the Dependency Theory as the main intellectual construct upon which MERCOSUR rests
From the establishment of LAFTA to the creation of MERCOSUR, it is remarkably evident what a pivotal role was played by ECLAC’s formulations and the Dependency Theory in the integration efforts attempted in the region. As a matter of fact, no other theory ever achieved such prestige among Brazilian and Argentine intellectual circles the way the Dependency Theory did. Just to mention one strong piece of evidence, formulations of the Dependency Theory have become, since their inception, an integral part of state policy in Brazil. Political changes, sometimes of a violent nature, did not alter this perception. Not even during the political shift towards the left, represented by the election of Luis Inacio Lula da Silva, did this perception alter significantly.

It can be correctly argued, therefore, that Dependency views represent a paradigm of Brazilian foreign policy. This paradigm has been implemented with remarkable consistency, even during turbulent times such as the economic crisis of the 1980s and the financial crisis of the 1990s. In their quest for industrialization and development, nations in the region, particularly Brazil and Argentina, have quite clearly understood the implications of the international division of labor and the capitalist world order. The historical moment in which MERCOSUR was formed only amplified these perceptions. After the dire economic crisis of the 1980s, it became evident that the fate of the region did not lie only in its own hands, but was also at the mercy of the world capitalist system. Countries in the region had to adapt or perish. Even newly industrialized giants such as Brazil and Argentina could not resist on their own the mighty winds blowing from a recently globalized world.

With the new challenges becoming unavoidable following the economic recession of 1983/84, Brazilian policymakers started looking back at their old source of inspiration: Dependency Theory’s formulations. Integration efforts that had been attempted in previous periods of time were revived and a new impetus was given. Since Dependency formulations were already an integral part of the region’s conceptual tools for understanding the world economy, it was no difficult job to form a consensus on which path to follow. From the signing of the ABEIP agreements to the Treaty of Asuncion, this was done with remarkable success, speed and accuracy. There was no doubting in the region that new conditions in the world economy would require new strategies. As when the Portuguese decided, back in the 15th century, to do the unthinkable and conquer the seas, using and dramatically improving an old technique learned from Arab sailors (the astrolabe), an old conceptual tool was brought to the fore to master this new challenge: the Dependency Theory.

From the 1960s on it became evident that a peripheral role was too much of a shame for a region with such a vast economic potential. Rich in natural resources, South America has been seeking its place in the sun in the world capitalist system. It is not hegemonic ambition that drives the peace-loving peoples of the region to seek greater integration. What South Americans have been trying to accomplish is the establishment of another pole of development and production in the world economy. The idea of a multiplicity of independent core areas of production, replacing a centralized, undemocratic core-periphery structure, has been a utopia in the region ever since the great liberator Simon Bolivar dreamt about a new world, free of tyranny and oppression.

In their dreams, South Americans are not alone: they are joined by North Americans, Europeans and the peoples of Asia, all of whom managed to establish healthy core areas of production in their respective regions. South Americans are also joined by their African brothers, who are now striving to follow a similar path of development, once the scourge of slavery and the colonial system has been overcome. The proposals of Dependency Theory were no new invention.

Having drawn upon historical materialism and Friedrich List’s elaboration about the importance of domestic markets, the Dependency Theory merely adapted such concepts to regional realities. The successful history of the Dependency Theory in fostering integration and economic development in South America remains a powerful beacon of hope for other peoples, who, for historical reasons, still have not had their chance to gain their place under the sun. Stormy seas may lie ahead. However, as the great Portuguese seaman once sang, with their characteristic courage: once the course is rightly set, there is no need to fear.

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